The ugly truth about Liberty Media & F1

Before I start this article I’ll state one thing that should be made clear about Liberty Media. They don’t own F1 – they are the sports commercial rights holders.

Their mandate is to maximise the revenue that the sport generates. It isn’t to introduce budget caps or determine technical specifications or licence drivers or teams wishing to compete in F1. This isn’t IndyCar or NASCAR.

It would be difficult today to find another sport that competes on a global scale that has its two key commercial rights owner’s executives devoid of any experience in the sport they are promoting. They are – Chase Carey, a former Fox TV executive, and Sean Bratches, a former ad sales executive at ESPN. Neither have any experience in F1 or any form of motor racing. It’s only with Ross Brawn do we have someone knowledgeable of F1, whose grandiose but deliberately vague title, “Managing Director, Motor Sports for the Formula One Group”, belies that much if not all of what he does for Liberty is largely outside the commercial rights holders domain. More about that later.

One of the first pronouncements incoming FOG (Formula One Group) CEO Chase Carey made was “We have 21 races – we should have 21 Super Bowls. It was clearly a rehearsed line and intended to give his audience the impression that FOG intended to do things on a big scale. For many of the reporters at the press conference the idea of F1 being turned into a Super Bowl type carnival show was anathema to what F1 is, its history or its future. Some, myself included, weren’t surprised that Carey used the Super Bowl analogy. Liberty quickly issued clarifications that that wasn’t what Carey really meant, it was about creating a unique spectacle, not ‘Americanizing’ F1. The unfortunate thing for F1 was, he really did mean it.

In July of this year Toto Wolff revealed that FOG had initiated talks with F1 teams about replacing the current Concorde Agreement with a franchise model. Wolff said that that FOG wanted a system where, “a team in future will have this ‘franchise’ forever, which helps to add value because you do not have to renegotiate (the Concorde Agreement) every eight years.” Super Bowls? Franchise systems? Where is this all going?

For an American(s) put into a position of running the commercial end of a sport that they really know little or nothing about, and tasked with creating bigger and bigger profits for their owner – Liberty Media, the obvious model is the NFL. American sports executives view the NFL as the Holy Grail and the wet dream of sports league models rolled into one. But would NFL model work in F1?

For those on the east side of the Atlantic who don’t know / understand / care of the structure of the NFL– here’s a brief overview.

The NFL consists of 32 teams in two interlocking leagues. After a regular season and then playoffs the NFL “World Champion” is crowned at the Super Bowl. The NFL is owned by the teams themselves. Each team owner gets one vote when it comes to rules changes and other issues which affect the game. The commissioner of the NFL is hired by the owners and reflects their will. There is no independent FA equivalent in the NFL. It is run by and for the team owners and no one else. The owners also equally split the revenue that the NFL commercial rights generate. Essentially the only revenue the owners independently control are what are earned in their stadiums – ticket / beverage / ad sales. Even things like jersey sales are run through the NFL.

The league itself is closed. You are either in or out. Unlike in European football where teams can be relegated to a lower division or promoted to a higher division, in the NFL no matter how bad you are you can never be relegated. There are only two ways in – buy an existing team or when once in a blue moon the league expands.

Financially each team operates under two different salary caps. First, there is an overall team salary cap and secondly, an individual player cap. As the team cap is based on a percentage of league revenue it effectively, and as I previously mentioned that teams have little other revenue, guarantees a similar profit to each team. Some extra revenue is gained by getting into the playoffs and Super Bowl but it is small compared to revenue that each of the 32 teams share. The individual player cap eliminates bidding wars for players, as is seen in European football. The goal is league parity. Whether you are in the largest market or smallest, the league makes sure that financially there are no winners or losers.

Financial parity, restricting new entrants, franchises, budget and salary caps and technical / rules making control. The parallels between the NFL and Carey’s future vision of F1 are remarkably similar. The question then becomes could it actually work in F1. I’ll argue that it can’t. But if it did F1 would simply become a global IndyCar / NASCAR series.

Money makes the world go round, and it certainly makes F1 cars go round a circuit. While I detailed the areas of the NFL that Carey would like to replicate in F1, the key ones are financial parity, budget caps and restricting entry. Guarantee that each team’s revenue is essentially identical and that it exceeds what it can spend, and with restricting entry, the value of each team rises as F1’s revenue rises. Bob Fernley of Force India is a big supporter. The problem is, he is about the only one.

F1 is unique in that many / most teams aren’t in the sport to turn a profit and again many of the teams are owned by the brand whose name the team competes under. And this is the first reason why Carey’s plan won’t work. Seven of the ten teams (eight if Alfa were to buy Sauber) that compete in F1 are there as marketing vehicles. The primary reason for being in the sport is to promote / enhance their brand or product. While I’m sure every team would like to turn a profit, the fact is that even if their F1 operation loses money, if the marketing value exceeds the money lost – they’re happy. Mercedes, depending on what accountant you believe and what financials you look at, inject about $50M – $100M into their team (essentially so the team breaks even) and for that Toto Wolff claims they receive about $2B in marketing value. Even a small team like Haas is in F1 to promote Haas Automation, if F1 doesn’t work as a marketing tool for Haas he’ll leave, even if he it does turn a profit. The issue of merchandise sales has also been raised, with FOG looking for a percentage of team product sales. Needless to say Ferrari, Mercedes and some of the other large teams have no interest in FOG getting any part of their brand sales. The issue then becomes do Ferrari, Mercedes and the others get the marketing value they receive now if FOG are able to dumb the sport down and it no longer is viewed as the pinnacle of motor sport. That question is easily answered by looking at IndyCar.

The second and maybe the biggest reason that Carey’s plan won’t work is the restrictive entry / franchise system, something that he believes will bring long-term increased team value. If I buy Manchester United, I own something called Manchester United. The same thing is true if I buy the Dallas Cowboys. The name, the history, the championships are transferred to me. That isn’t usually true in F1. For a team like Ferrari, trying to convince them that in ten years their asset value will double, would likely bring a lot of blank stares. Other than for accounting purposes Ferrari couldn’t care less what the team is valued at – it will never be sold. The same basically holds true for Mercedes, Renault, Red Bull, Toro Rosso, McLaren and Haas for a slightly different reason. Their teams are brands and if any of them decided to sell out they’ll never allow you to keep their name, unlike the Manchester United example. And it has happened in the past with Renault, Honda and Jaguar and others. The first thing that happened when they were sold was the names were removed. All the purchasers really got were physical assets. The real value of the team – name, brand, history were gone. What that means in the real world is effectively over time because of the budget cap every team’s value becomes the same.

I mentioned that I would address Ross Brawn, and in this it’s really his role in F1’s Strategy Group (basically the rules making part of F1), an area FOG would like to control. I’m convinced that the main reason, maybe the only reason, Brawn was brought in was to give FOG credibility, something which they lack with Carey and Bratches. While I’m sure there is some common ground in areas of safety and cost reduction in components, I doubt that the teams and the FIA have any interest in handing rules / technical control over to FOG. In the Strategy Group, the teams and the FIA are natural allies as both of their interests go far beyond F1, while FOG operates in an F1 vacuum. If the FIA need support in Formula E they can get it from Mercedes or Renault, in the WEC from Ferrari, and the list goes on. Mercedes, Renault and Ferrari can then expect support from the FIA. Quid pro quo. F1 has as much interest in allowing FOG to set the rules as the EPL has in allowing BT or SKY to. And good luck trying to convince Marchionne to give up Ferrari’s veto.

I view FOG (Liberty Media) in much the same way as I viewed Ecclestone in the last few years – part of the problem, not part of the solution. I’ve detailed why I don’t believe their plan is workable and even if it was it would no longer be F1 but a hybrid between IndyCar and NASCAR, where it becomes a border-line spec series with bizarre rules like competitive yellows and stage racing. I hope FOG is a transitory stage to the teams owning the sport. We shall see.

Update – October 4th – It was announced today that ESPN are the new F1 rights holders in the US for the 2018 season replacing NBC Sports. Sean Bratches was formerly Executive Vice President of Sales & Marketing at ESPN Inc

I assume they do want year on year profits but that does not appear to be their primary focus to me. They are looking to improve the sport so the value is realized long term. I doubt they see CVC profit taking levels as any sort of benchmark they need to meet personally.

A venture capital group like CVC lives on sucking maximum profit out of investments ASAP and moving on as the well starts to dry up.

Bernie did a great job in his time. CVC probably helped him extend that 5 or 10 years too long. Not hating on either them. Especially as Bernie appears to have found the right buyer at the right time in the end anyway.

Liberty probably will go rouge U.S.A. style at some stage and try to change the racing product into a more equalized series that pays prizemoney for participation instead of winning as US sports do. I’ll hate it if they get that far, but right now I agree with you that Liberty can’t really make changes like that without a lot of pushback expected.

I am sure Marussia, Lotus and Vergin would have appreciated owning franchises.
You write of limited accessability, F1 might as well be franchise based considering how lengthy the process is for a new team.
What would be interesting is if F1 allowed two to four wild cards per race as MotoGP does.

I think you have it pretty right, cav. For mine, I’d emphasis the power of the grandees, who have no reason to change anything substantial. They’ll effectively “allow” some minor changes through to improve the spectacle etc, etc, but the big boys have far too much invested in the way things are to let some jumped-up marketing greaseballs screw it up. In fact, I genuinely think each of the big teams would happily ride the sport into the ground if it suited their purposes.

Unlike the author I’m willing to give Liberty Media the benefit of the doubt here. They have not been around a whole year yet and there is still much to learn. However, the teams did not take the opportunity to buy shares in the sport when it was offered by Liberty. I suspect it was part uncertainty and part lack of knowledge for that move and no guarantee on return on investment. Liberty’s plan would obviously appeal to the smaller non-factory teams, looking for financial and competitive parity. There’s still time for Chase, Sean and Ross to formulate a plan acceptable to most of the teams.

The snag is of course that F1 journalists understandably have their own interest in maintaining some sort of status quo. Anyone rocking the boat too much may suddenly find their job becoming difficult especially if they were to have their journo privilledges revoked by F1. Just as magazines and ordinary motoring journalists would not say much against VW over dieselgate as they do not want to lose all the perks afforded to the media by big car comanies. It’s just the way the world works unfortunately but at least the internet allows individuals to some extent to have a say!

It is a sad state of affairs that the FIA has sold the sport down the river by handing the commercial rights to a bunch of cowboys. Max annd Bernie’s 100 year deal was hardly in the sport’s best interests. The FIA should have kept the commercial rights and if they did not wish to be involved in the day to day operation they could have used a Facilities Management arrangment where the administration would be handled by a services company for a fixed fee with contracts of maybe 5 or 7 years at a time. A comparable example is the way that any large organisations handle their IT requirements by contracting out rather than doing it in house. My local authority contracts out waste collection and processing services to experts rather that do it less efficiently themselves. The F1 profits could be shared within the sport instead of a large amout going to the rights holders. The FIA could also have some control over making sure that some FTA TV wpuld prevail to help the teams’ sponsors to get better ROI . The bottom line is that F1 does not need a commercial rights holder. It was a construct invented by Bernie and has become the monster that is eating the sport!